Public company board members are not showing a lot of love for audit rotations. According to consultancy BDO 68 percent of respondents to a recent survey said they opposed US and international regulators’ proposals for implementing mandatory rotation of external auditors.
This opposition in the US is running counter to trends in Europe, where many institutional investors have come out in support of rotations (see related story here).
In the US audit rotations are being pushed hard by the Public Company Accounting Oversight Board. In August 2011 the PCAOB issued its controversial Concept Release on Auditor Independence and Auditor Rotation. The concept was developed to push some of the ideas that came out of Sarbanes-Oxley on various ways to foster “a more fundamental shift in the way the auditor views its relationship with its audit client.” One way was forcing companies to change auditors every few years, “to ensure a fresh set of eyes viewing a company’s books… and to spur competition in the audit field.”
Competition in the audit market has also been a big driver for change in the UK. UK regulators put together a Competition Commission to study (study recently completed) whether there was collusion among the Big Four (while it found “market dynamics implied ‘tacit’ collusion, with firms agreeing not to compete, it could not find any evidence this was the case.”). There is still concern however as research has shown that the Big Four dominate the audit market, having audited more than 90 percent of FTSE 350 companies. (It should be noted that BDO, along with fellow mid-tier consultant Grant Thornton, was one of the firms urging the investigation of its larger competitors.)
Pushback.
Most companies and certainly the auditor community have been pushing back against the proposals on rotation. The argument is that an auditor’s cumulative knowledge of a company’s business, its people and processes, controls and risks, play a large role in the quality of an audit. Many companies, despite often being frustrated by their auditors, feel that the time and effort needed to re-educate a new auditor would be overly burdensome.
In addition to the large percent opposed to rotations, BDO found that more than three-quarters (78 percent) were also opposed to mandatory tendering of the external audit.
BDO also polled boards about financial reporting and international financial reporting standards (IFRS). In terms of reporting, most boards of directors (88 percent) said they were “comfortable” with their ability “to stay current on changes to accounting and financial reporting standards.” And more than two-thirds (70 percent) felt there were already “so many financial disclosures in financial statements today” that it was “difficult to decide what information is most important.” In terms of the US moving to IFRS, most respondents were in support of the international standard, with almost two-thirds (63 percent) saying US companies should be allowed to use IFRS in their public reporting.